ExpertMedium1 markShort Answer
ACCA · Question 41 · Preparing Simple Consolidated Financial Statements
Section B - Case 1
Scenario: GlobalTech PLC acquired 80% of CloudServe Ltd on 1 July 20X5. Year-end is 31 December 20X5. GlobalTech paid $5m cash and issued 1m shares (market value $2 each). CloudServe's net assets at acquisition were $6m. Fair value of NCI at acquisition was $1.5m. Post-acquisition, CloudServe sold goods to GlobalTech for $1m at a 25% mark-up on cost. Half of these goods remain in inventory at year-end. CloudServe's profit for the full year was $800k (accruing evenly).
Calculate the Provision for Unrealized Profit (PUP) in inventory at year-end (in $).
Section B - Case 1
Scenario: GlobalTech PLC acquired 80% of CloudServe Ltd on 1 July 20X5. Year-end is 31 December 20X5. GlobalTech paid $5m cash and issued 1m shares (market value $2 each). CloudServe's net assets at acquisition were $6m. Fair value of NCI at acquisition was $1.5m. Post-acquisition, CloudServe sold goods to GlobalTech for $1m at a 25% mark-up on cost. Half of these goods remain in inventory at year-end. CloudServe's profit for the full year was $800k (accruing evenly).
Calculate the Provision for Unrealized Profit (PUP) in inventory at year-end (in $).
How to approach this question
Total profit on intra-group sales = $200,000. Half remains in inventory. PUP = $200,000 * 50% = $100,000.
Full Answer
The total profit on the intra-group sales was $200,000. Since half (50%) of these goods remain in GlobalTech's inventory at year-end, the unrealized profit is $200,000 * 50% = $100,000. This amount must be eliminated from consolidated inventory and retained earnings.
Common mistakes
Eliminating the full $200,000, or applying the 80% parent ownership to the PUP.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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